How does a Child Trust Fund work?

How does a Child Trust Fund work?

Thursday, 28 June 2012 04:09

Child Trust Funds have certain tax advantages

When it comes to investing for children, your options could well depend on your child's birth date.

Children born between September 1st 2002 and January 2nd 2011 will have a Child Trust Fund (“CTF”), while those born outside of these dates are eligible for a Junior ISA (“JISA”) provided they are still under 18 and are resident in the UK.

Junior ISAs were introduced to replace Child Trust Funds in November 2011 and offer parents a tax-efficient vehicle in which to deposit money for their children. Like a JISA, CTF’s are tax-efficient savings instruments that allow you to put money away for your child's future.

It is important to note that tax laws are subject to change and your tax assumptions may be affected if this were to occur. Any tax relief that you are eligible for will depend on your individual circumstances. It may be a wise move to seek independent tax advice to ensure you are fully aware of your position in relation to tax.

CTF’s are no longer available to newborn babies, however, those who did receive a government voucher and set them up are still able to pay money into them. CTFs share many similarities with JISA’s, although there are some differences you need to be aware of.

Like Junior ISA’s, you have different options available. There are three different types of accounts – a cash account, a stakeholder account and a non-stakeholder account. As the name suggests a cash CTF is a deposit account were you will receive a rate of interest on the deposit amount. A stakeholder account is usually an equity based product that has various guidelines on how the money can be invested. A non-stakeholder account is like a stakeholder account but without these restrictions, therefore it provides access to a wide range of investments, typically stocks and shares based funds.

With stocks and shares investments, it is important to remember that past performance is not indicative of future performance and the value of your investment will rise or fall in line with the performance of the underlying asset.

In terms of who can pay into the account, family members and friends may deposit funds up to a maximum of £3,600 per birthday year. This figure will rise annually with inflation from 2013.

The investment you make is tax-efficient, with no capital gains or additional income tax payable. In addition, inheritance tax can be avoided provided the donor survives for seven years after the gift is made. However, remember that your tax assumptions will depend on your individual circumstances and tax laws can change, which could affect your investment in the future.

Managing the fund is the responsibility of the person that opened it, also known as the registered contact. As the registered contact, you should keep all of the paperwork in a safe place and notify the account provider of changes to your address and other important information.

Should you wish to transfer your CTF, you are free to do so in the same way that parents with Junior ISAs can switch to another provider.

A CTF can help towards putting your child on a stable financial footing for when they reach adulthood and it is imperative that you understand exactly how they work. If you are unsure, a financial adviser can provide all of the information you need, helping you to make an informed decision.

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Finance articles

When the government announced that Child Trust Funds would be closed to new applicants, HMRC predicted that around 1.2 million children would have children's ISAs taken out on their behalf by their parents to fill the gap.

When it comes to your offspring's future finances, opening a children's savings account is an essential first step. Once you have done so, you can start thinking about the most effective ways to contribute to their nest egg – read our guide to learn more about the top three.

Child Trust Funds are no longer available to newborn babies, however, if you are in possession of a valid voucher, you could still open one for your child. It is important to research CTFs so you know how they work and what you can hope to achieve.

If you are looking to set aside some money for your child's future, a Junior ISA is one of your options. There are potential tax advantages to be gained from these accounts and you can choose either a cash account or an investment ISA.

Research always tells us that Child Trust Funds are popular with parents and that take-up of the scheme is strong. The Conservatives say they will scrap the scheme if they win the election saying they are only necessary for the worst off families. So does the investment scheme work? Myfinances.co.uk's Kate Saines sought the views of a group of parents.

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